How do Financial Shocks Affect Older Adults Financial Stability

• In Event: Financial Security and Well-being in Retirement

Abstract

While emergency savings are widely accepted as a crucial leg for financial well-being, much of our understanding of how much households need to weather unexpected spending shocks is focused on working-age households. However, unexpected expenses do not go away once people retire.  Retirees face a different set of shocks, so it is not clear what emergency savings should encompass for retirees.  This paper uses data from the 1992-2020 HRS and the 2001-2021 CAMS, linked with SSA’s administrative cross-year benefits file. For this study, we match consumption data measured in one year to the HRS core interview data from the prior calendar year. Using the HRS and the accompanying CAMs, the analysis estimates expenses from four broad categories: 1) “rainy day” expenses such as replacing an air conditioner or new tires; 2) out-of-pocket healthcare costs; 3) home maintenance costs; 4) financial help for family members; and 5) costs associated with long-term care.  The importance of the various expenses – such as healthcare costs – are likely to increase with age, so we examine households at various ages over their retired lifecycle. We first document typical expenses retirees face as they age, second, we examine whether different socioeconomic and demographic groups may be more likely to experience higher expenses in different categories and, finally, estimate the probability expenses from each category will surpass a certain percent of income. Preliminary results indicate that unexpected expenses related to everyday maintenance of home, vehicle, and general living are more significant among Black and Hispanic households. Women are more likely to be affected by unexpected healthcare expenses compared to men and these expenses tend to persist for longer periods because of higher longevity among women. 

Author

• Manita C Rao, University of Southern California
  Presenting Author